UFG: the elephant in the room

Natural gas is the most important energy source in Pakistan’s energy mix providing 40% of its primary energy supplies for decades. According to the Energy Year Book for 2022, Pakistan’s indigenous gas reserves amount to 19.5 trillion cubic feet (Tcf).

The country’s domestic gas production stood at 3.39 billion cubic feet per day (bcfd), while it imported 1 billion cubic feet per day (bcfd) of LNG (Liquefied Natural Gas) at a cost of USD 4.93 billion during the FY 2022.

The gas sector has ratcheted a whopping PKR 2.9 trillion circular debt as a consequence of mismanagement and many other contributing factors, which include revenue shortfall, subsidies, non-payment, LNG ring fencing and diversions, Unaccounted for Gas (UFG). This article focuses just on UFG which is one of the main contributing factors.

Surprisingly, the much maligned Pakistan’s power sector line losses are marginally higher than the global benchmark where the total additional financial impact/loss is around PKR 113 billion (Nepra’s State of Industry Report 2022.) UFG rates, however, shoot up to a staggering 6-7 times higher than international benchmarks with SSGC 15% and SNGPL 8.23% at present (Table 1).

Assuming an LNG import price of USD 10 per unit on a DES basis, and taking into account an average UFG rate of 300 MMCFD over the last five years, the financial loss exceeds USD 1.1 billion per annum, which is 2-3 times higher than line losses in power sector.

This sum could generate around 2250MW of electricity, PKR 5.67 per kWh at PKR 1050 per MMBtu using indigenous gas, in contrast, the current cost for the same electricity from RLNG-N government power plants is PKR 22.6 per kWh at RLNG price of 4,184 per MMBtu, resulting in a staggering difference of PKR 16.93 per unit in fuel cost, which could have saved PKR 333.56 billion PKR annually. High UFG rates not only erode the revenue of gas, but also become an unprecedented unjustified financial burden on consumers.

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                                                         Table 1
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Table R-1 - International UFG Allowances
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Countries           Population       Urban         Area         density      Network   Consumption             UFG
                                   Population    (Km){2}      (P/Km){2}        (Km)        BM{3}         Benchmark
                                       %
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USA                324.118,787       82.7%      9,155,898          35       2,225,032     759.4         1.41%-5%**
Canada              36.286,378       81.9%      9.071.595          4         100,000      104.4              2.65%
Germany             80.682,351       77.2%       348,520          232         34,327       77.5              2.16%
United Kingdom      65,111,143       81.7%       241.959          269         39.778       70.2              1.00%
Turkey              79.622,062       71.9%       769,295          104         15,641       48.5              4.20%
Russia             143,439,832       73.2%     16,,299,981         9         259,913      409.2              5.00%
Australia           24,309,330       89.2%      7,,596,666         3         580,000       38.8        0.5%-4.03%*
Ukraine             44,624,373       69.5%       579,537           77         45.597       33.8              2.60%
Bangladesh         162.910,864       34.9%       130,172          1252        20,804       22.9              5.00%
New Zealand         4,565,185        87.8%       263.884           17         15.000       5.4               2.45%
Croatia             4.225,001        59 5%        55,960           76         3,020        2.8               3.30%
Pakistan           192.826,502       38.9%       770,998          250        141,190       41.2             8%-15%
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Source: Central Intelligence Agency (CIA), The world fact book and KPMG Data Bank.
The information presented above is based on facts and figures publicly available and recent statistics of the 
countries. The dates of these statistics varies and are between 2013-2015.
o 0.5% is the UFG Benchmark for AGNL Queensland and 4.03% is for Multinet.
** 1.41% is the UFG Benchmark for Atlanta and 5% is for Texas.
Source: Data adapted from "Second Draft-Unaccounted for Gas (UFG) study" by KPMG Risk Consulting, Karachi office,
dated February 3, 2017.
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UFG is calculated by taking the difference between the metered volume of gas entering Transmission and Distribution (T&D) network at the point of dispatch or delivery and the metered volume received by end consumers at their metering stations.

It is normally expressed as percentage by dividing this difference with gas available for sale in a defined time period and system. In financial terms, UFG is the overhead cost in business of transporting gas, it is lost revenue as it must be added to gas sales to determine price and total gas requirement.

It is the elephant in the room which nobody talks about that impacts every other issue in gas sector such as demand-supply gap, rising cost of gas and import of expensive LNG.

The glaring disparity in UFG vs. electricity line losses rate is primarily attributed to technical reasons; this position further underscores the severity of Pakistan’s UFG problem but also begs the following three questions.

1- Why has Pakistan logged consistently high UFG levels — 5-7 times international standards?

2- Why has the problem of UFG in Pakistan persisted substantial efforts of the two gas companies to reduce it?

3- What should be done to reverse the growth and bring Pakistan’s UFG down towards international level? How long is it going to take and how much is it going to cost?

1- Contributing factors to UFG

To address the above queries, we need to understand that high UFG in Sui’s network is caused by various factors which are not independent but there exist multiple interactions between them as expounded below.

1.1. Political and governance factors

a) Article 172 of Constitution, Government of Pakistan (GoP) owns the gas molecules but State-Owned Entities business is not based on ownership of molecules. GoP also holds a majority stake in SSGC and significant shares in SNGPL, but does not actively engage in its role as a shareholder, failing to fulfil its responsibilities. GoP needs to reevaluate the existing tariff regime and put an end to guaranteed rates of return as it results in extension of network which is directly related to UFG. Asset expansion should be tied with viability.

b) Gas is used as a political commodity by governments and used to garner votes and goodwill at the elections. However, at present piped natural gas is only available to about 10 million out of 38 million households. The urban population drives 80% consumption, resulting in an untargeted subsidy ironically presented as a socioeconomic initiative. All other households rely on costly alternative energy sources, including biomass, coal, wood and LPG.

c) Domestic sector consumption in Suis increased more than 4% from 310 BCF in FY2022 to 323 BCF in FY2023 despite sharp decline of 7-9% in indigenous gas production.

The cost of gas is tied to dollar indices and crude oil prices, which has increased due to global energy crisis, this cost escalation, however, has not been passed on to consumers. Previous plans to implement price increases in a staggered or phased manner were not executed mainly due to political reasons.

d) Three-phase A-1 domestic consumers are charged 14,493 PKR per MMBtu for electricity, LPG 5,298 PKR per MMBtu and RLNG 4,473 whereas the average price for piped natural gas among domestic consumers stands at PKR 380 per MMBtu in SNGPL, PKR 450 per MMBtu in SSGCL.

The bar chart underscores significant price anomalies in energy sources and colossal economic distortion caused by underpricing indigenous natural gas. From the first slab of domestic piped natural gas tariff at PKR 121 per MMBtu to the eleventh tier rate for natural gas supplied to CNG stations at PKR 1800 per MMBtu, natural gas maintains a significant cost advantage over other fuels, acting as an entry barrier.

e) Local populations were not made stakeholders and did not get fair share which not only contributed to UFG problem but also created law and order situations. Government has been unable to ensure the security of substantial portions of SSGC’s network, especially in areas like Balochistan and KPK where UFG rates are excessively high.

f) UFG for RLNG is based on SNGPL provided actual figures which is very high in distribution network increasing the RLNG price, making it unaffordable for consumers.

Ogra’s introduction of inflexible UFG benchmarks across the country have not only had a financial impact on the gas companies, but have diverted top management from efforts to reduce UFG to efforts to modify Ogra’s requirements, resulting in endless and fruitless legal proceedings.

g) The government’s role in appointing managing directors and boards of directors for the gas companies, along with the involvement of courts, NAB, and FIA, has led to high turnover of management and a notable lack of autonomy and professionalism among management.

h) Cathodic protection (CP) stations are vital components across the gas network. These stations facilitate the passage of electric current through pipelines, effectively shielding them from corrosion and various environmental factors. Last two decades of frequent power outages due to power load shedding has deteriorated pipelines increasing the leaks especially in the distribution main.

i) Workable life is reduced to 50% within certain segments of the gas infrastructure caused by the fluctuating flow rates and pressures due to gas load shedding practices. This is also leading cause of measurement and billing errors which by estimate is 20% of UFG.

In the light of above, it would not be an overstatement to that the causes of Pakistan’s elevated UFG also lies in Islamabad; both in actions and decisions the government and the regulator has taken and the areas it has neglected.

1.2. Economic factors

There are multiple economic distortions in gas sector such as price discrimination, subsidies, monopolies, ring fencing, regulatory barriers and suboptimal gas infrastructure.

a) Natural gas pricing is not based on economic principle of scarcity and optimal utilisation which resulted in misuse, misallocation and inflated demand. Government decision to keep the consumer’s prices especially domestic at far below than Ogra prescribed price coupled with Sui business model based on market-based return on asset have resulted in exponential growth of SNGPL and SSGC Transmission and Distribution Network to an extent where it becomes unmanageable. Management focus shifted from essential network rehabilitation and maintenance to business expansion which generates additional unjustified returns for the companies.

b) Supplying expensive gas on cheaper rates to residential sector with high UFG and cost of service and expansion of the networks at rapid rates over many years was primarily driven by political rather than consumer mix and economic considerations. The current pricing structure for gas is ineffective and encourages theft, particularly in backward regions of Balochistan and KPK.

c) To meet the demand of domestic consumers in Punjab, RLNG is being diverted towards domestic sector for 6 months a year. Mismatch between RLNG cost and domestic selling price has resulted in piling of huge shortfall and main contributor of RLNG circular debt of approximately PKR 600 billion. Diversion to domestic this winter alone will cost over Rs 200 billion and is a significant portion of gas sector circular debt.

d) Replacing the outdated residential areas gas distribution network is economically not feasible due to decline in indigenous gas production, high capital expenditure and technical challenges in densely populated urban areas. Hence, shifting more natural gas to bulk-use industries can cut costs, reduce UFG, add economic value and improve bulk to retail ratio. (GoP) should establish a target bulk-to-retail ratio of 60:40 for gas supply. Gas supply to bulk-consumers is mainly through dedicated lines designed to operate at high pressures ensuring minimal occurrences of gas leakages and pilferages.

e) Sui companies practicing price discrimination can manipulate UFG figures by attributing losses to lower-priced system gas units and to the LNG user, distorting monetary costs while physical gas losses remain constant. To address this, auditors should ensure transparent measurement, historical analysis, and independent verification of UFG data, a practice that is currently lacking.

More practical approach is to implement Weighted Average Cost of Indigenous Gas (WACOG) for RLNG and indigenous gas with uniform pricing for all consumers. For FY2023-24, Ogra has set uniform pricing at PKR 1,350.68 per MMBtu for SSGCL and PKR 1,238.68 per MMBtu for SNGPL.

If the federal government aligns gas prices according to Ogra’s provisional sale price for Sui’s especially domestic sector, it could lead to more efficient gas consumption by consumers. WACOG framework for RLNG and gas will address price anomalies between indigenous gas and RLNG. It will help rationalise demand and ascertain actual levels of UFG in Suis.

1.3. Institutional causes for UFG

a) An extreme hierarchical structure stifles innovation and the growth of talented individuals. Political and other influence has forced the gas companies to have staffing levels well beyond international norms to provide jobs. A gas company in developed country like Australia similar to SSGC has about 10% of SSGC’s employee numbers, but has a UFG level below 3%.

b) Gas theft is widespread especially in SSGC, with a large number of customers engaging in various forms of theft. Cultural acceptance of theft has evolved over time addressing this issue will be a long-term challenge. Corruption exists at various levels which influences decisions even at higher level of management and impedes efforts to reduce UFG.

c) Power sector’s energy mix is forced to change and sector is moving away from RLNG to other sources such as nuclear, coal and renewables. RLNG will be consumed at distribution in SNGPL where UFG is very high due to leakages, gas theft, measurement, and billing errors. The shift will exacerbate the financial impacts of UFG.

Given the multi-layered and deep-rooted challenges contributing to Pakistan’s high UFG rates it is crucial to approach solutions with a comprehensive understanding of the issue of technically controllable and uncontrollable gas losses.

The consulting firm M/s ICONSULT, engaged by Ogra on October 7, 2021, to audit and ascertain the actual UFG in both indigenous and imported RLNG systems was focused on technical losses.

Government should extend its purview beyond mere auditing and numbers as technical aspects intertwined with the challenges, it will provide insightful and implementable roadmap that can guide Pakistan’s gas sector a sustainable future.

This is especially significant in current scenario as the long-term contract LNG price will be USD 12 per MMBtu DES price as Brent crude oil has climbed to USD 93 per barrel, oil rises to highest in 2023 driven by expectations of tight supply. Just imagine if 200 MMCFD of gas/RLNG could be retrieved from UFG, this could save Pakistan USD 938 million per annum and also provide cheaper gas to industry for boosting exports.

Copyright Business Recorder, 2023